Reversing the Slide

Clinical Professor James B. Shein offers a three-pronged approach to saving a
distressed company

By Sara Langen

As the saying goes, when it rains, it pours — but financial and operational problems don’t have to drown a business, says James B. Shein.

The Kellogg clinical professor of management and strategy insists that there are ways not only to prevent but reverse the ensuing landslide.

“Almost any organization can be turned around, but you’ve got to start early,” he explains. “You have to watch for and recognize the early warning signals.”

Educating business leaders about the stages of decline and how they can fix a company in distress are Shein’s goals in his new book, Reversing the Slide: A Strategic Guide to Turnarounds and Corporate Renewal. A turnaround expert, Shein has decades of experience as a C-level executive and business leader who has advised, purchased and revived distressed companies.

In the book, Shein outlines five stages of decline:

(1) Blinded. There are warning signs of problems, but the company has not recognized them.

(2) Inaction. Competitors steal market share or cash reserves run low. Executives discuss the problems but no action is taken.

(3) Faulty Action. Management is spurred to act, but the proposed remedies make the situation worse.

(4) Crisis. The company is bleeding cash. This is a company’s last chance to get back on course to profitability.

(5) Dissolution. The company descends into the final dissolution phase, which typically requires a bankruptcy filing.

Shein explains that turnaround managers, like entrepreneurs, face crisis situations that require the skillful management of multiple constituencies that are often in conflict.

“If you’ve woken up to the problems within your organization, you really need to start thinking like an entrepreneur,” he says. “You need to refocus your strategy before you downsize, before you negotiate a new capital structure for the balance sheet and before you start making the changes that are needed.”

The 10 conditions most frequently encountered by turnaround professionals are also characteristic of start-up situations. These include:

• a lack of cash

• hiring difficulties

• time sensitivities

• centralized decision-making

• scarcity of knowledge and risk

• supplier problems

• lack of credibility with lenders

• a great chance for equity gains

These similarities may explain why Shein is often asked about the risks and rewards of investing in a distressed company.

His thought? “There are potentially terrific returns and rewards in distressed investing,” he explains. “But you have to choose in which phase you’re willing to buy a company. Are you looking for early-stage distressed? Or are you going for more late-stage, which can be a bargain but carry higher risk?

Regardless of the stage, turnaround practitioners should apply what Shein calls the “Turnaround Tripod,” a three-pronged approach that addresses strategic, operational and financial changes.

“If you apply this method, you can fix any organization — whether it’s a for-profit company, government entity or another type of organization,” he says.

“I want this book to wake people up,” Shein explains. “And if you’re already in any trouble, understand how you can fix your problems now.”

READING CORNER

“If a company is in crisis phase, there will be pressure to stop the bleeding of cash quickly. This is particularly true if bankruptcy looms large. Strategy decisions will be made quickly, on an ad-hoc basis, while cutting costs and looking for sources of cash. This means the optimal future strategy must be delayed in order to survive today. … In any phase of the curve, however, there must be some decision as to strategy. It will be done rapidly and more on instinct if the organization is running out of cash, but is still just as important as saving cash.”

— Excerpted from Reversing the Slide: A Strategic Guide to Turnarounds and Corporate Renewal (Wiley Publishing, March 2011)